Perspective: Morning Commentary, 02/17/2016

Wednesday, February 17, 2016

February 17 – Crude oil posts modest gains this morning, despite bearish news from Iran. Iran’s representative to OPEC reportedly stated it would be “illogical” for Iran to participate in a production freeze. This makes an agreement unlikely without concessions to Iran to allow them to ramp up production. The proposed freeze at January production levels would have left the supply pipeline flowing at near-record levels. Any concession would have increased that flow even more at a time when global storage facilities are filling up. Of course, this all assumes that agreement participants would hold to the deal, which rarely seems to happen. Even so, traders are still respecting the double bottom on the charts for now, although an actual bottom has not yet been confirmed.

Japan’s stocks remained weak overnight, while China and much of Europe generally posted 1 to 2% gains. Traders took courage from the ability of crude oil to hold above recent lows, even as fears regarding the banking sector ease. U.S. stock futures suggest modest gains as well, despite less than stellar economic data released this morning.

Falling mortgage rates are driving refinancing efforts, with applications up 16% for the second consecutive week. However, purchase applications declined 4% in the latest week, although they still remain 30% higher year-on-year. Housing starts for January came in at an annual rate of 1.099 million units, down from 1.143 million in December and down from Wall Street expectations of 1.175 million. New permits for houses were at an annualized rate of 1.202 million, down from 1.204 million the previous month and down from market expectations of 1.224 million permits.
On the other hand, inflation pressures are a bit stronger than anticipated by Wall Street. The producer price index rose 0.1% in January, versus market expectations of a repeat post of a minus 0.2% reading seen December. The core PPI that excludes food and energy rose 0.4% over the previous month, beating expectations of a 0.1% rise. The core PPI is up 0.6% year-on-year. Industrial production rose 0.9% in January, beating expectations of a 0.4% rise. The dollar firmed to new one-week highs following the release of the above data, gaining on both the yen and the euro in the currency market. The dollar’s fundamentals would appear stronger than both the yen and the euro longer-term, although it still needs to overcome chart damage done earlier this month when the yen exploded higher on carry trade unwinding.

Money is again flowing into the major commodity indices this morning, bolstered by the modest strength in crude oil. Like crude oil, the Thomson Reuters CRB index chart continues to show a friendly double-bottom at these long-term multi-year lows, but a bottom has not yet been confirmed. Even so, we will likely continue to see modest flow into the commodities as long as the existing bottom holds in the crude oil market.

Grain and oilseed prices posted modest gains Tuesday, the first trading day after Friday’s CFTC commitment of traders report showed that the speculative hedge funds held record short positions in Kansas City wheat and near-record short levels in Chicago wheat and in soybeans. They built the short positions based on the bearish fundamentals seen across the grain complex, but they grew uneasy with the industry being so short just ahead of the growing season when weather risks are more of a reality. As such, some short-covering was in order, but a sustained rally will likely remain difficult without a more legitimate threat and/or greater help from money flowing into the broader commodity indices. The market is very comfortable with just-in-time supplies of corn and soybeans unless/until those supplies are threatened and no such imminent threat currently exists on either side of the equator. South American weather is good for crops and any potential North American threats are still on the distant horizon.

Unless otherwise noted, the posts on this blog should be construed as market commentary, merely observing economic, political and/or market conditions, and not intended to refer to any particular trading strategy, promotional element or quality of service provided by INTL FCStone Inc. or its subsidiaries. INTL FCStone Inc. is not responsible for any trading decisions taken by persons viewing this material. Information contained herein was obtained from sources believed to be reliable, but is not guaranteed as to its accuracy. These materials represent the opinions and viewpoints of the author, and do not necessarily reflect the viewpoints and trading strategies employed by INTL FCStone Inc. or its subsidiaries. Reproduction without authorization is prohibited. All rights reserved.

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